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FinCEN comments on Russia’s suspended FATF membership; issues statements on jurisdictions with AML/CFT/CPF deficiencies
On March 9, FinCEN informed U.S. financial institutions that last month the Financial Action Task Force (FATF) suspended the Russian Federation’s membership after determining that the country’s “actions unacceptably run counter to the FATF core principles aiming to promote security, safety, and the integrity of the global financial system.” (Covered by InfoBytes here.) FATF also urged jurisdictions to monitor for and mitigate emerging risks resulting “from the circumvention of measures taken in order to protect the international financial system.”
Additionally, FinCEN noted that at the end of February, FATF issued public statements updating its lists of jurisdictions with strategic deficiencies in anti-money laundering (AML), countering the financing of terrorism (CFT), and countering the financing of proliferation of weapons of mass destructions (CPF) regimes. These include (i) Jurisdictions under Increased Monitoring, “which publicly identifies jurisdictions with strategic deficiencies in their AML/CFT/CPF regimes that have committed to, or are actively working with, the FATF to address those deficiencies in accordance with an agreed upon timeline,” and (ii) High-Risk Jurisdictions Subject to a Call for Action, “which publicly identifies jurisdictions with significant strategic deficiencies in their AML/CFT/CPF regimes and calls on all FATF members to apply enhanced due diligence, and, in the most serious cases, apply counter-measures to protect the international financial system from the money laundering, terrorist financing, and proliferation financing risks emanating from the identified countries.”
With respect to jurisdictions under increased monitoring, FinCEN’s announcement reminded U.S. covered financial institutions of their due diligence obligations for foreign financial institutions (including correspondent accounts maintained for foreign banks), and instructed them to ensure that they implement “appropriate, specific, risk-based, and, where necessary, enhanced policies, procedures, and controls that are reasonably designed to detect and report known or suspected money laundering activity conducted through or involving any correspondent account established, maintained, administered, or managed in the United States.” Money services business are reminded of parallel requirements with respect to foreign agents or counterparties. Members were informed that FATF removed Cambodia and Morocco from its list of Jurisdictions under Increased Monitoring but added Nigeria and South Africa to the list.
FinCEN’s announcement also informed members that Burma remains on the list of High-Risk Jurisdictions Subject to a Call for Action, and advised U.S. financial institutions to apply enhanced due diligence. Moreover, U.S. financial institutions should continue to refer to existing FinCEN and OFAC guidance on engaging in financial transactions with Burma. With respect to the Democratic People’s Republic of Korea and Iran, “financial institutions must comply with the extensive U.S. restrictions and prohibitions against opening or maintaining any correspondent accounts, directly or indirectly, for North Korean or Iranian financial institutions,” FinCEN said, adding that “[e]xisting U.S. sanctions and FinCEN regulations already prohibit any such correspondent account relationships.”
OFAC sanctions “shadow banking” network responsible for moving billions for Iranian regime
On March 9, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions against “39 entities constituting a significant ‘shadow banking’ network,” pursuant to Executive Order 13846. OFAC explained that this network is “one of several multi-jurisdictional illicit finance systems,” which grants sanctioned Iranian entities access to the international financial system and obfuscates sanctioned entities’ trade with foreign customers. “Iran cultivates complex sanctions evasion networks where foreign buyers, exchange houses, and dozens of front companies cooperatively help sanctioned Iranian companies to continue to trade,” Deputy Secretary of the Treasury Wally Adeyemo said in the announcement. “Today’s action demonstrates the United States’ commitment to enforcing our sanctions and our ability to disrupt Iran’s foreign financial networks, which it uses to launder funds.” The action follows previous designations of six Iran-based petrochemical manufacturers or their subsidiaries, as well as three firms located in Malaysia and Singapore, for their involvement in the sale and shipment of petroleum and petrochemicals on behalf of a previously designated company (covered by InfoBytes here).
As a result of the sanctions, all property interests belonging to the sanctioned targets subject to U.S. jurisdiction are blocked and must be reported to OFAC. Additionally, “any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked.” U.S. persons are also generally prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons. Persons that engage in certain transactions with the individuals or entities designated today may themselves be exposed to sanctions or subject to enforcement. Additionally, OFAC warned that “any foreign financial institution that knowingly facilitates a significant transaction for any of the individuals or entities designated today could be subject to U.S. sanctions” unless an exception applies.
CFPB seeks feedback on LO comp
On March 10, the CFPB issued a Request for Comment (RFC) seeking feedback on the Regulation Z Mortgage Loan Originator Rules, including the provisions often referred to as the Loan Originator Compensation or “LO Comp” Rule. (See also blog post here.) The Bureau states that a significant focus of the RFC is to assist in determining whether the Rule should be amended or rescinded to minimize the Rule’s economic impact upon small entities.
The Mortgage Loan Originator Rules, among other things, prohibit compensation to loan originators that is based on the terms of a mortgage transaction (or proxies for terms), prohibit a loan originator from receiving compensation from both the creditor and consumer on the same transaction, prohibit steering a consumer to a particular loan because it will result in more compensation for the loan originator unless the loan is in the consumer’s interest, require certain records related to compensation be kept, and implement licensing and qualification requirements for loan originators.
The RFC is open-ended insofar as it requests public comment on any topic related to the impact of the Mortgage Loan Originator Rules pursuant to section 610 of the Regulatory Flexibility Act (Section 610). Section 610 mandates a review of all agency rules which have a significant economic impact upon a substantial number of small entities within ten years of its effective date. In conducting a Section 610 review, the agency must consider (i) the continued need for the rule; (ii) the nature of complaints or comments received concerning the rule from the public; (iii) the complexity of the rule; (iv) the extent to which the rule overlaps, duplicates, or conflicts with other Federal rules, and, to the extent feasible, with State and local governmental rules; and (v) the length of time since the rule has been evaluated or the degree to which technology, economic conditions, or other factors have changed in the area affected by the rule.
Notably, the RFC references feedback it has previously received from stakeholders related to the Mortgage Loan Originator Rules, specifically referring to recommendations it has received related to (i) whether to permit different loan originator compensation for originating State housing finance authority loans as compared to other loans (i.e., on bond loans); (ii) whether to permit creditors to decrease a loan originator’s compensation due to the loan originator’s error or to match competition; and (iii) how the Rule provisions apply to loans originated by mortgage brokers and retail loan originators differently. Each of these topics has been a source of significant industry input, including in response to the CFPB’s 2018 Request for Information Regarding the Bureau's Adopted Regulations.
The Bureau is most likely simply following standard procedure to comply with Section 610, which mandates the CFPB conduct a review within ten years for all rules that significantly impact small entities. But it is possible that the Bureau may be open to making certain adjustments to the Rule that industry has been clamoring for since the Rule was implemented, particularly as the Bureau chose to specifically reference three such recommendations.
HUD establishes 40-year loss-mit option
On March 8, HUD published a final rule in the Federal Register to allow mortgagees to increase the maximum term of a loan modification from 360 to 480 months for FHA-insured mortgages after a borrower defaults. HUD explained that “[i]ncreasing the maximum term limit will allow mortgagees to further reduce the borrower’s monthly payment as the outstanding balance would be spread over a longer time frame, providing more borrowers with FHA-insured mortgages the ability to retain their homes after default.” The change also aligns FHA with modifications made available to borrowers with mortgages backed by Fannie Mae and Freddie Mac, both of which provide a 40-year loan modification option. HUD considered public comments in response to a proposed rule published last April (covered by InfoBytes here), and noted that commenters said a 40-year loan modification option would provide significant relief to struggling borrowers. Concurrently, HUD published Mortgagee Letter 2023-06 to establish the standalone 40-year loan modification policy. The final rule is effective May 8.
Biden administration urges states to join fee crack down
On March 8, the Biden administration convened a gathering of state legislative leaders to hold discussions about so-called “junk fees”—described as the “unnecessary, unavoidable, or surprise charges” that obscure true prices and are often not disclosed upfront. While the announcement acknowledged actions taken by federal agencies over the past few years to crack down on these fees, the administration recognized the role states play in advancing this effort. The Guide for States: Cracking Down on Junk Fees to Lower Costs for Consumers outlined actions states can take to address these fees, and provided several examples of alleged junk fees, including hotel resort fees, debt settlement fees, event ticketing fees, rental car and car purchase fees, and cable and internet fees. The guide also highlighted “the banking industry’s excessive and unfair reliance on banking junk fees.” The administration pointed out that a number of businesses have changed their policies in response to the increased scrutiny of junk fees and said several banks have ended fees for overdraft protection. The same day, the CFPB released a new Supervisory Highlights, which focused on junk fees uncovered in deposit accounts and the auto, mortgage, student, and payday loan servicing markets (covered by InfoBytes here).
Additionally, HUD Secretary Marcia L. Fudge published an open letter to the housing industry and state and local governments, encouraging them to “limit and better disclose fees charged to renters in advance of and during tenancy.” Fudge noted that “actions should aim to promote fairness and transparency for renters while ensuring that fees charged to renters reflect the actual and legitimate costs to housing providers.”
California Attorney General Rob Bonta also issued a statement responding to the administration’s call to end junk fees. “Transparency and full disclosure in pricing are crucial for fair competition and consumer protection,” Bonta said, explaining that in February the state senate introduced legislation (see SB 478) to prohibit the practice of hiding mandatory fees.
House Republicans question CFPB’s card late-fee proposal
On March 1, several Republican House Financial Services Committee members sent a letter to CFPB Director Rohit Chopra expressing concerns over the Bureau’s credit card late fee proposal. Among other things, the lawmakers claimed that last year the Bureau broke precedent by failing to address, for the first time, credit card late fees when the agency issued the annual fee adjustments as required under Regulation Z, which implements TILA (covered by InfoBytes here). “In prior years when the CFPB did not make inflation adjustments, because inflation was low, it explained the statistical basis for not indexing the fee,” the letter said. “However, the CFPB has yet to explain or justify why there was not an increase in the most recent annual adjustment announcement—a striking lack of transparency and accountability, and especially so in an era of outsized inflation.” The lawmakers also addressed the Bureau’s February notice of proposed rulemaking (NPRM) to amend Regulation Z and its commentary. As previously covered by InfoBytes, the Bureau said the NPRM would lower the safe harbor dollar amount for first-time and subsequent-violation credit card late fees to $8, eliminate the automatic annual inflation adjustment, and cap late fees at 25 percent of the consumer’s required minimum payment. According to the lawmakers, the changes would disincentivize consumers to make timely payments and impact consumer behavior by shifting “delinquent payment costs to other, innocent, consumers who absorb the associated costs through higher rates or inability to further access unsecured credit that they may need to smooth their consumption.”
The lawmakers posed several questions to the Bureau, including asking why the agency failed to convene a panel as mandated by the Small Business Regulatory Enforcement Fairness Act of 1996 to advise on the rulemaking “[g]iven the broad applicability of this rule making to small institutions.” The Bureau was also asked to provide the data used to determine the dollar limits, as well as any communications the agency had with the Biden administration in the development of the NPRM.
Online lender asks Supreme Court to review ALJ ruling
A Delaware-based online payday lender and its founder and CEO (collectively, “petitioners”) recently submitted a petition for a writ of certiorari challenging the U.S. Court of Appeals for the Tenth Circuit’s affirmation of a CFPB administrative ruling related to alleged violations of the Consumer Financial Protection Act (CFPA), TILA, and EFTA. The petitioners asked the Court to first review whether the high court’s ruling in Lucia v. SEC, which “instructed that an agency must hold a ‘new hearing’ before a new and properly appointed official in order to cure an Appointments Clause violation” (covered by InfoBytes here), meant that a CFPB administrative law judge (ALJ) could “conduct a cold review of the paper record of the first, tainted hearing, without any additional discovery or new testimony.” Or, the petitioners asked, did the Court intend for the agency to actually conduct a new hearing. The petitioners also asked the Court to consider whether an agency funding structure that circumvents the Constitution’s Appropriations Clause violates the separation of powers so as to invalidate prior agency actions promulgated at a time when the Bureau was receiving such funding.
The case involves a challenge to a 2015 administrative action that alleged the petitioners engaged in unfair or deceptive acts or practices when making short-term loans (covered by InfoBytes here). The Bureau’s order required the petitioners to pay $38.4 million as both legal and equitable restitution, along with $8.1 million in penalties for the company and $5.4 million in penalties for the CEO. As previously covered by InfoBytes, between 2018 and 2021, the Court issued four decisions, including Lucia, which “bore on the Bureau’s enforcement activity in this case” by “deciding fundamental issues related to the Bureau’s constitutional authority to act” and appoint ALJs. During this time, two different ALJs decided the present case years apart, with their recommendations separately appealed to the Bureau’s director. The director upheld the decision by the second ALJ and ordered the lender and its owner to pay the restitution. A district court issued a final order upholding the award, which the petitioners appealed, arguing, among other things, that the enforcement action violated their due-process rights by denying the CEO additional discovery concerning the statute of limitations. The petitioners claimed that they were entitled to a “new hearing” under Lucia, and that the second administrative hearing did not rise to the level of due process prescribed in that case.
However, the 10th Circuit affirmed the district court’s $38.4 million restitution award, rejecting the petitioners’ various challenges and affirming the director’s order. The 10th Circuit determined that there was “no support for a bright-line rule against de novo review of a previous administrative hearing,” nor did it see a reason for a more extensive hearing. Moreover, the petitioners “had a full opportunity to present their case in the first proceeding,” the 10th Circuit wrote.
The petitioners maintained that “[d]espite the Court’s clear instruction to hold a ‘new hearing,’ ALJs and courts have reached divergent conclusions as to what Lucia requires, expressing confusion and frustration regarding the lack of guidance.” What it means to hold a “new hearing” runs “the gamut,” the petitioners wrote, pointing out that while some ALJs perform a full redo of the proceedings, others merely accept a prior decision based on a cold review of the paper record. The petitioners argued that they should have been provided a true de novo hearing with an opportunity for new testimony, evidence, discovery, and legal arguments. The rehearing from the new ALJ was little more than a perfunctory “paper review,” the petitioners wrote.
Petitioners asked the Court to grant the petition for three reasons: (i) “the scope of Lucia’s ‘new hearing’ remedy is an important and apparently unsettled question of federal law”; (ii) “the notion Lucia does not require a genuinely ‘new’ de novo proceeding is necessarily wrong because a sham ‘remedy’ provides parties no incentive to litigate Appointments Clause challenges”; and (iii) the case “is an ideal vehicle to provide guidance on Lucia’s ‘new hearing’ remedy.” The petitioners further argued that “Lucia’s remedy should provide parties an incentive to raise separation of powers arguments by providing them actual and meaningful relief.”
The petitioners’ second question involves whether Appropriations Clause violations that render an agency’s funding structure unconstitutional, if upheld, invalidate agency actions taken under such a structure. The petitioners called this “an important, unsettled question of federal law meriting the Court’s review,” citing splits between the Circuits over the constitutionality of the Bureau’s funding structure which has resulted in uncertainty for both regulators and regulated parties. Recently, the Court granted the Bureau’s request to review the 5th Circuit’s decision in CFSAA v. CFPB, which held that Congress violated the Appropriations Clause when it created what the 5th Circuit described as a “perpetual self-directed, double-insulated funding structure” for the agency (covered by InfoBytes here).
OFAC sanctions Iranian officials for serious human rights abuses
On March 8, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions, pursuant to Executive Orders 13553 and 13846, against several Iranian regime officials and entities for serious human rights abuses against women and girls. Included among the sanctioned individuals are “the top commander of the Iranian army and a high-ranking leader in the Islamic Revolutionary Guard Corps (IRGC), as well as an Iranian official who was central to the regime’s efforts to block internet access.” OFAC also imposed sanctions against three Iranian companies and their leadership for their role in enabling the violent repression by the Iranian Law Enforcement Forces of peaceful protestors. The actions, taken in coordination with the EU, UK, and Australia, mark the continued effort to impose sanctions on persons who engage in serious human rights abuse or censorship with respect to Iran.
As a result of the sanctions, all property and interests in property belonging to the sanctioned persons subject to U.S. jurisdiction are blocked and must be reported to OFAC. Additionally, “any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked.” OFAC further warned that “persons that engage in certain transactions with the persons designated today may themselves be exposed to sanctions or subject to an enforcement action,” and that “any foreign financial institution that knowingly facilitates a significant transaction or provides significant financial services for any of the persons designated today could be subject to U.S. sanctions.”
SEC files emergency action on $100 million crypto fraud
On March 6, the SEC announced it had filed an emergency action against a Miami-based investment adviser and one of its principals (collectively, “defendants”) in connection with a $100 million crypto asset fraud scheme. According to the SEC’s complaint, filed in the U.S. District Court for the Southern District of Florida, the defendants allegedly promised investors that their money would be primarily used to trade crypto assets and would generate returns through separately managed accounts and five private funds. The SEC alleged, however, that the defendants “disregarded the [funds’] structure, commingled investor assets, and used over $3.6 million to make Ponzi-like payments to fund investors.” Moreover, the SEC claimed that the defendants falsely represented that one of the funds received an audit opinion from a “top four auditor,” when in fact none of the funds ever received an audit opinion. The individual defendant also allegedly misappropriated investor money for personal use and provided altered documents with inflated bank account balances to a third-party administrator of some of the funds.
The SEC’s complaint alleges violations of the antifraud provisions of the federal securities laws and seeks permanent injunctions, disgorgement, prejudgment interest, and civil money penalties. The SEC is also seeking an officer and director bar and conduct-based injunction against the individual defendant. Additionally, the complaint includes a list of “relief defendants” and seeks disgorgement from each of the funds and from another entity that allegedly received approximately $12 million from the defendants and the funds. The announcement noted that the SEC successfully received an asset freeze, appointment of a receiver, and other emergency relief against the defendants.
DFPI issues more proposed changes to Student Loan Servicing Act
On March 6, the California Department of Financial Protection and Innovation (DFPI) issued a notice of second modifications to proposed regulations under the Student Loan Servicing Act (Act), which provides for the licensure, regulation, and oversight of student loan servicers by DFPI (covered by InfoBytes here). Last September, DFPI issued proposed rules to clarify, among other things, that income share agreements (ISAs) and installment contracts, which use terminology and documentation distinct from traditional loans, serve the same purpose as traditional loans (i.e., “help pay the cost of a student’s higher education”), and are therefore student loans subject to the Act. As such, servicers of these products must be licensed and comply with all applicable laws, DFPI said. (Covered by InfoBytes here.) In January, DFPI issued modified proposed regulations, outlining additional changes to definitions, time zone requirements, borrower protections, and examinations, books, and records requirements. (Covered by InfoBytes here.)
Following its consideration of public comments on the modified proposed regulations, DFPI is proposing the following additional changes:
- Amendments to definitions. Among other changes, the proposed changes amend “education financing products” to include private student loans which are not traditional loans. This change reverts the definition back to the word used in the original proposed rules. DFPI explained that this change “is necessary because the term ‘private student loan’ is defined later in the rules . . . but the term ‘private education loan’ is not separately defined.” The proposed changes also clarify “that the payment cap, which is the maximum amount payable under an income share agreement, may be expressed as an APR or an amount or a multiple of the amount advanced, covered, credited, deferred, or funded, excluding charges related to default.” Additionally, the changes revise the definition of “qualifying payment” to explain that “qualifying payments count toward maximum payments and the payment cap but not also the payment term.”
- Borrower protections. The first round of changes revised the time zone in which a payment must be received to be considered on-time to Pacific Time, in order to protect California borrowers. However, in further modifying the timing requirement, DFPI explained in its notice that “[r]equiring cut off times different than those posted on the servicer’s website just for California borrowers would deviate from standard current practices, would require system changes and enhancements that would be very expensive to implement and could cause confusion and operational risk to both servicers and borrowers. Limiting the exception to only those situations where the servicer has not posted the cut off time aligns with servicers’ operational capabilities and national banking standards.”
- Qualified written requests. The proposed changes clarify requirements for sending acknowledgments of receipt and responses to qualified written requests.
The second modifications also clarify provisions related to education financing servicing report requirements, and provide that upon notice, a student loan servicer must make available for inspection its books, records, and accounts at a licensed location designated by the DFPI or electronically.
Comments on the second modifications are due March 23.
- Keisha Whitehall Wolfe to discuss “Tips for successfully engaging your state regulator” at the MBA's State and Local Workshop
- Max Bonici to discuss “Enforcement risk and trends for crypto and digital assets (Part 2)” at ABA’s 2023 Business Law Section Hybrid Spring Meeting
- Jedd R. Bellman to present “An insider’s look at handling regulatory investigations” at the Maryland State Bar Association Legal Summit